The Iron Bank

The European Central Bank is failing abjectly in [update:what should be] its core mission to protect the common currency through shared prosperity as well as price stability. It no longer deserves its name and logo.

So here are my proposals for a new name and logo.

The new logo:And new name:

There is a fine episode in The Game of Thrones where Stannis and Davos travel to the Iron Bank of Braavos and are forced to sit on low benches at the end of a huge and intimidating hall apparently designed by Albert Speer. They beg for a loan, in vain. The ambience would be familiar to Tsipras and Varoufakis.

had been the standard before then, but Hitler despised them as a poor fit

in this age of steel and iron, glass and concrete, of womanly beauty and manly strength, of head raised high and defiant will ..

So Gothic type suddenly became Jewish, Schwabacher Judenlettern. The claimed Jewish origin is ahistorical, according to Wikipedia: ghettoÂ Jews in Germany were no more likely to flock to the high-risk and new technology business of printing in the 1530s than Lubavitchers have been dominating Silicon Valley. Perhaps it was aimed by Bormann and Goebbels at the traditionalistÂ Julius Streicher, publisher of the vile anti-Semitic rag

At all events, we have to credit the Nazis with getting it right on the merits of the typefaces: a very rare stopped-clock case, along with their objections to smoking and cruelty to animals.

Oh, they were right on bankers too, for the wrong reason. They despised them as Jews, a complete misapprehension. But the bias helped immunize them against deference to the economic CW that bankers promulgate, and peacetime fascist economic policy in Germany and Italy, and Mosley’s platform in Britain, were quite Keynesian.

Comments

James: … in its core mission to protect the common currency through shared prosperity as well as price stability.

This is not what Article 127 (1) TFEU says; the ECB's primary objective is price stability; all other goals are subordinate (as opposed to the Fed). The failing lies with the design of the Eurozone and is not really the fault of the ECB.

Quite right in law. But it's nonsense politically. The euro can't survive without prosperity, and it is the fault of the ECB not to have recognized this. Salus reipublicae suprema lex. Greece is stlll headed for the exit, and the risk of further break up is rising now that Schäuble has broken the taboo. On TV, the Iron Bank of Braavos refuses the loan not on narrow banking grounds but because Stannis is going to lose his war.

Nobody is talking about a guarantee, only a serious and professional effort. As Katja notes, the formal mandate of the US Fed requires it to seek full employment as well as low inflation. Similar provisions hold for the Bank of England and the Reserve Bank of Australia. If it’s not there formally, common sense (and the memory of Germany on 1930-33) shouts for it to be inferred. The ECB has been quite creative in stretching its mandate on financial stability, assuming the classical function of lender of last resort in panics and backstopping the sovereign bond markets of Italy and Spain.

Those are national banks so I don't the analogy is apt. I think we need to take Europe for what it is, not what it is sometimes imagined to be or what one might want it to be. It's not a nation state, it's not unified in a robust political or economic structure, it's institutions lack democratic legitimacy and authority with good reason…the ECB can't act like a national bank or promise what a national bank can promise because there is simply no there there, no "Europe" in which to promote prosperity. There are instead actively competing nations who are often happy to have prosperity at the expense of someone else and try to use the ECB to try to make that happen. One could say it shouldn't be like that, but that doesn't change the fact that it is like that.

" there is simply no there there, no "Europe" in which to promote prosperity." I think you may have been spending top much time in Whitehall, which still refuses to take the European confederal project seriously. It's intended to take away components of sovereignty from nation states and vest these state functions in a European government. The euros in my wallet, and the Schengen immigration area, make me a subject of the Eurostate: issuing currency has been a jealously guarded privilege of kings since well before Offa of Mercia.

You are dead right about the democratic deficit though. National central banks, where they still exist in the full sense (so not counting the vestigial central banks of the Eurozone), have an extraordinary degree of autonomy, but still have last-resort accountability to electorates. The ECB is as unaccountable as the Pope or the East India Company: even less so so than the Iron Bank of Braavos, which presumably has shareholders or partners. The ECB boss has to answer questions from time to time in the European Parliament, that's literally all. It's as far from an intergovernmental institution as you can get.

James wrote “It’s intended to take away components of sovereignty from nation states and vest these state functions in a European government.”

Absolutely agree, and that is the dilemma in that this occurs without an e pluribus unum within the electorate to make it work. With no real cultural connection/shared interest between — to pick two countries out of the air — Greece and Germany, a government that oversees both of them won’t maximize their collective well-being but will become a vehicle for the more powerful society to dominate the less powerful. I do I suppose have a Whitehall view, but we all watched the Euro crisis which has validated that view, especially for the average person on the street.

It's not as though the ECB hasn't been trying under Draghi, but it has reached the limits of what it can do. The ECB has begun a QE program, but that has to be more conservative than the Fed's. Draghi has promised to do "whatever it takes" to preserve the Eurozone. Notably, the continued ELA to Greek banks is technically illegal; the presumption that Greek banks are solvent, but illiquid (a requirement for ELA) is nothing but a polite fiction. Of course, it is the right thing to do (because otherwise the Greek economy would collapse). So, yes, the ECB is already pushing the envelope, but on its own it's not enough and I doubt it ever can be.

A key difference between the multi-objective Anglo-American central banking model and the single-objective German central banking model (which the Eurozone copied for the ECB) is that in the German model, the central bank has always been paired with a public strategic investment bank (also known as a development bank) that took care of those issues that the central bank couldn't. This element is notably absent or minimal in most other Eurozone countries (with Spain being the main exception, and that only recently). While other European countries have development banks also (and the EU has the EIB), they're not operating at remotely the same scale relative to GDP.

Germany's development bank is the KfW (Kreditanstalt für Wiederaufbau). It does targeted lending (primarily for housing, infrastructure, renewable energy, SMEs, and developing countries) and is used by the government to leverage up subsidies through public-private partnerships. It can do (and does) what neither the Bundesbank nor the ECB can do: fiscal stimulus, countercyclical spending, and it does a lot of it. It's essentially a targeted form of QE that relies on borrowing rather than money creation [1]. It also works hand in glove with a central bank's policy of price stability: KfW simply forwards the resulting low interest rates to borrowers.

For reference: KfW hat about €440 billion outstanding loans in 2014 relative to a GDP of about €2903 billion. Scaled up to the US economy, this would amount to investments worth about $3 trillion (i.e. comparable in size to the Fed's QE program). Caveat: a significant part of the loans actually go to developing countries and other EU countries; however, given how export-oriented Germany is, this indirectly still benefits the German economy.

Germany prefers this borrow-and-lend approach to the borrow-and-spend approach of direct government subsidies because (like QE) it is reversible; and unlike QE, it can target liquidity injections more precisely and runs less of a risk of creating asset price inflation and bubbles while creating innovation. It also has the political benefit of being much easier to sell to voters; KfW looks like a normal bank, except that its investment is mission-oriented rather than profit-based.

This is not to say that this approach is better or worse than the Anglo-American model (arguments can be made for either, and the KfW has had its share of problems). The problem is that most Eurozone countries do not have something comparable to compensate for the ECB's overriding focus on price stability, and the ECB is and will forever be more limited than the Fed and the Bank of England (barring a treaty change).

Money creation through fractional reserve banking requires that the liabilities of the bank are largely current accounts, transfers from which are accepted as means of payment. I assume you cannot get a checking account from the KfW. Therefore it does not create money and its expansion by borrowing in the markets does not affect the Euro money supply. It's a nice point whether it should be counted as part of the liabilities of the German state and its fiscal balance, but that's because of the implied or legal state guarantee not seigniorage agency.

The money-multiplier effect of fractional reserve banking does not require current/checking accounts at all. It only requires that the money that is being borrowed from depositors is being lent again, up to the fractional reserve. Current/checking accounts have the benefit that they carry low or no interest, but KfW already enjoys low interest rates, and without them, they don't have to worry about bank runs.

In any event, my larger point is that the Eurozone adopted the German central banking model, but not the biggest policy lever Germany had that allowed it to conduct countercyclical economic/monetary activities while pursuing a primary goal of price stability. And the ECB's other policy options are too limited, even when pushing the envelope. Arguably, the biggest obstacle remains the Stability and Growth Pact due to its Procrustean nature.

Can a fractional-reserve bank create money if its liabilities are not part of the circulating pool of accounts used for regular commercial transactions, the usual definition of money? I think not. The KfW accepts term deposits from say insurance companies (shifting them from other investments, say consumer credit firms, so this action is macroeconomically neutral) and lends them for infrastructure. The infrastructure spending goes to firms and workers, who bank them in current accounts with commercial banks. Nothing has happened to the commercial banks' reserves, so they cannot expand their total lending. The initial shift by the insurance companies has led to an equal and opposite contractionary effect elsewhere. So there is no expansion of the money supply.

The macroeconomic impact of development banks comes from the fact that the loans are cheap. More investment projects become financially sound. The relative price effect shifts aggregate spending from consumption to investment, which is expansionary if there are excess savings. The IS curve shifts a little to the right. Nothing happens to the LM curve. I don't see how development banks can act as significant countercyclical stabilisers, without changes in the government deficit or the money supply in commercial banks. Germany has never really understood Keynes!

The money multiplier effect occurs on the lending side of the balance sheet. Example: A bank has $100 billion in deposits (whatever the source); it lends $90 billion of that, which eventually end up in other accounts. Now we're at $190 billion total. This is pretty much the same that regular banks do outside of a crisis, but are currently unwilling to do.

As you observed, what's missing here is that the money is not necessarily being lent again when regular banks are risk-averse, so you don't get the normal geometric series of fractional reserve banking effects in a growing economy, e.g. $100+$90+$81+$72+… billion, but the effect is still very similar to what the Fed did with QE. Both QE and a public investment bank have a similar effect in that they inject liquidity in the market, but cannot guarantee that the market will actually run with that. They both have up- and downsides; QE can lead to asset price inflation (if the liquidity remains stuck in assets) wasting part of the effort, public investment can displace regular loans (which is why KfW actually partners with regular banks and primarily lends through them rather than lending directly) or choose their investment strategies poorly (see the example of Brazil's BNDES).

Also, as I noted above, lending (and thus the injection of liquidity) is not the only countercyclical measure that a development bank can engage in. Because it is generally working in close cooperation with the government, it can leverage up subsidies through PPPs, thus amplifying the effect of other public countercyclical measures.

More importantly, while you're absolutely correct that a development bank (or QE, for that matter) is no substitute for the full range of monetary policymaking, normal monetary policies had pretty much stopped working in the crisis. After all, this is why the Fed went to QE and the ECB went to negative interest rates. But I don't disagree with you that the Eurozone design is flawed; my point is that it's even more flawed because the Eurozone got rid of even the one policy lever that Germany was perfectly happy with and that can actually provide an economic stimulus.

At one point, the Bank calls in loans from all over Westeros and refuses to lend money to anyone, causing a financial crisis and economic chaos. It is also made clear that the Bank doesn't care if it beggars the kingdom to tax enough for them to be repaid.

Its unofficial motto is "The Iron Bank will have its due." The implication is that it will be repaid in one way or another.

Looks like you specified a resident (Windows?) font. Try using a downloadable font (e.g. from Google: https://www.google.com/fonts . There's instructions somewhere there on how to link it into your page.)

I've tried, but don't think I have enough unaccountable power over the server.

It's probable that nobody but me is seeing the font correctly. Readers would need to download a version of Antiqua – I got it from here – , but nobody will bother to do this. The black-letter font is Old English Text MT from here. the Der StÃ¼rmer title is a gif and will reproduce accurately, worse luck.Update 3 August: fixed by photoshopping the texts into image files.